Rule No. 1 of not looking guilty? Don’t bicker with your accuser.
Rule No. 2 of not looking guilty? If you must bicker with your accuser, don’t use another guilty party as the yardstick with which you’re measuring yourself.
Alibaba (BABA) and some of its fans broke both rules on Monday, and Alibaba stock owners paid the price as the “pro” arguments only served to highlight the “con” case.
It remains to be seen which side of the table will win this war of words, but given that the bearish accusation’s logic holds water while the defense’s case requires a good dose of hope and conjecture, current and would-be shareholders of BABA would be wise to tread lightly.
Barron’s Drops the Hammer
The accusation in question is one penned by Barron’s columnist Jonathan Laing.
In his commentary “Alibaba: Why It Could Fall 50% Further,” posted on Saturday, Laing points out several key problems that have been plaguing Alibaba stock and will likely continue to trouble it for the foreseeable future.
The write-up raises several good questions, including concerns over how the company’s e-commerce traffic and per-capita spending is oddly — perhaps implausibly — higher than China’s government-researched reports of the same data.
Laing also used some specific, less subjective measures to make his bearish case against Alibaba stock, though. Namely, he pointed out that BABA stock was priced at a frothy 25 times the company’s forward-looking earnings estimates. For comparison, eBay (EBAY) traded at 15 times its projected income for the coming year at the time.
In other words, Laing is anything but impressed.
The Counterarguments Look, Sound and Feel Silly
It didn’t take long for Alibaba Senior Vice President Jim Wilkinson to respond just as publicly. In a lengthy letter posted at e-commerce news site Alizila, Wilkinson took issue with many of the points and conclusions made by Barron’s Laing.
One would have expected such a counterargument to make clear, convincing sense — and to be fair, some of Wilkinson’s responses had merit.
Other pieces of the pushback, however, were weird and clumsy, almost confirming Laing’s suspicions.
For example, Wilkinson noted:
“Comparing Alibaba’s PE multiple to eBay’s PE multiple [of 15] is flawed because eBay does not operate in China. A more relevant comparison would be with our large-cap Chinese Internet peers. The PE multiples of Tencent and Baidu on consensus 2015 earnings are 31x and 24x, respectively.”
Doesn’t operate in China? Valuation metrics know no boundaries, but even if the eBay comparison isn’t relevant, comparing the valuation of Alibaba stock to that of Tencent (TCEHY) or Baidu (BIDU) doesn’t exactly help the cause. Both of those stocks are also arguably overvalued, and headed into the same headwind of a verifiable economic slowdown in China.
Never mind the fact that neither is an online-retailing name.
Wilkinson went on to say:
“The ‘average annual spend per user”, derived from dividing Alibaba’s 12-month GMV by 12-month active buyers for the past seven quarters (the period referred to by Mr. Laing) was actually RMB6,759 on average, or US$1,056 at the 6.4 RMB/USD exchange rate, as opposed to the US$1,215 calculated by Mr. Laing …
“More importantly, the average annual spend per U.S. online shopper reported by Mr. Laing is clearly incorrect. According to the U.S. Census Bureau, total retail e-commerce sales in the United States amounted to US$298 billion in 2014. Based on our estimate of 179 million online shoppers in the United States in 2014 using Forrester Research projections, the average annual online spend per U.S. online shopper in that year would be US$1,665. This number is 73% higher than the annual average online spend per U.S. shopper claimed by Mr. Laing. The miscalculation of Alibaba’s ‘average annual spend per user’ and the gross under-reporting of average annual spend of U.S. shoppers by Mr. Laing entirely undermine his conclusions.”
Even if Wilkinson is right, he’s splitting hairs … and, he’s glossing over a much bigger question.
In a country where the average income is about $8,800 per year, where do 367 million of those people find roughly $1,000 — 11% of their typical income — to spend online when U.S. shoppers (who are much better versed at online shopping) only spend an average of $1,665 — or 6% of their average annual income of roughly $27,000 — on online shopping? China’s urban dwellers aren’t that widely affluent.
Regardless of which numbers are the right ones, the scope of each set does inspire curiosity.
Supporters’ Arguments Aren’t Any Better
Wilkinson wasn’t the only one to come to the company’s defense. SunTrust‘s Bob Peck (who has a price target of $100 on Alibaba stock) also lashed back. Yet, his responses seemed even flimsier.
His first point of contention? Peck opined that investors were overlooking about $7 billion worth of “hidden assets” not presently showing on the balance sheet. He suggested rising valuations of Alibaba’s portfolio companies should push the asset tally on the balance sheet up from $33 billion to $40 billion.
Maybe they should. But, who values them, and how would they be valued? Why are they hidden?
Investors have been burned by the balance-sheet shell game before.
It’s Peck’s second supportive argument that really raises a red flag, though. He believes Alibaba is going to see revenue growth of 29% regardless of what appears to be a brewing economic headwind.
He also noted Alibaba is being cautious with its spending.
The words certainly ring bullishly for Alibaba stock, but once again, critical details have been omitted. How is Alibaba going to sidestep China’s slowdown? The company has already logged three straight quarters of slowing growth, and may well be working on a fourth.
For that matter, how is Alibaba — a company that clearly overspent in the recent past — suddenly so good at fiscal restraint?
Stating the goals is easy. Implementing them is tough, and that’s what BABA stock owners need to be able to believe in.
None of this is meant to bash Alibaba or Jack Ma; both were beaten up enough over the past couple of days.
But the odd unwillingness to talk about the key issues the Barron’s commentary raised — or the simple dismissal of them as wrong without citing a meaningful reason as to why — not only doesn’t help buoy Alibaba stock, it may even work against it, forcing current shareholders to wonder if all the evasiveness is a tacit admission that something troubling is brewing.
BABA stock may well be the best investment of the decade. Until Laing’s premises are proven inaccurate or unmerited, though, the market would be wise to simply note the over-the-top reaction to a relatively common bear-thesis piece.
As Shakespeare put it in his play Hamlet, “The lady doth protest too much, methinks.”
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.